The GSEs’ Adverse Market Refinance Fee

The GSEs’ Adverse Market Refinance Fee

INSIGHTi
The GSEs’ Adverse Market Refinance Fee
Updated August 28, 2020
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), were chartered by
Congress to provide liquidity for both the single- and multi-family mortgage markets. In the years
following the housing and mortgage market turmoil beginning in 2007, the GSEs experienced financial
difficulty. On September 6, 2008, the Federal Housing Financial Agency (FHFA), the GSE’s primary
regulator, took control of them from their stockholders and management in a process known as
conservatorship. FHFA has since implemented various initiatives to improve the GSEs’ financial
conditions, and it has recently prioritized their exit from conservatorship. Specifical y, the GSEs are now
being al owed to accumulate capital reserves to buffer against mortgage default risks, and FHFA has re-
proposed a rule to establish a capitalization framework that would be in place following their return to
stockholder control.
On August 12, 2020, both Fannie Mae and Freddie Mac announced an adverse market refinance fee of 50
basis points (0.5%) on the cash-out refinance loans purchased by the GSEs. Although the fee was initial y
planned to go into effect on September 1, 2020, FHFA announced on August 25, 2020, that it has been
delayed to December 1, 2020, following concerns—some announced and some expressed directly to
FHFA—by some Member of Congress.
The fee would also apply to Fannie Mae’s limited cash-out refinance and Freddie Mac’s no cash-out
refinance products, which cap the amount of home equity borrowers can withdraw, typical y to roll some
or al of the closing costs into their mortgages. (If, for example, a lender sold a refinanced mortgage of
$300,000 to a GSE, the lender would be charged a fee of 0.5%, or $1,500.) Per the August 25, 2020,
announcement by FHFA, the GSEs are to exempt refinance loans with loan balances below $125,000.
Approximately half of these mortgages would be comprised of lower-income borrowers at or below 80%
of area median income. Furthermore, the GSEs’ products that target creditworthy low-income borrowers
would also be exempt.
FHFA has stated that the additional revenue collected by the GSEs would be used to offset projected
losses related to Coronavirus Disease 2019 (COVID-19) of at least $6 bil ion. In general, the GSEs
guarantee investors in their mortgage-backed securities (MBSs) timely repayment of principal and interest
generated from the underlying mortgages linked to the MBSs. By granting forbearance (i.e., deferred
mortgage payments) to borrowers adversely affected by the Coronavirus Disease 2019 (COVID-19)
pandemic, some mortgages are not generating cash flows. For this reason, the GSEs may be experiencing
chal enges to their cash flows by attempting to forward payments to investors that hold their MBSs while
simultaneously providing forbearance to borrowers affected by COVID-19. The revenue generated by the
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0.5% fee could offset these cash flow pressures facing the GSEs and al ow them to continue meeting their
payment obligations without experiencing severe cash flow shortfal s. Given that the GSEs have received
funds from Treasury while under conservatorship, the 0.5% fee might reduce or abate the need for
additional support. Predicting how much revenue the fee would generate for the GSEs is difficult because
of the chal enges in predicting how many additional homeowners would refinance after December 1,
2020, particularly given that many people have already refinanced with the recent decline in interest rates.
When a tax or fee is imposed on a product or service, it can be paid by either the demand or supply side of
the market in relatively equal or unequal portion sizes. Likewise, after the 0.5% fee is imposed on a
refinanced mortgage product, either the borrowers or mortgage originators can pay relatively equal or
disproportionate amounts. For this reason, the effects of the 0.5% fee on borrowers and mortgage
originators are uncertain.
 Mortgage originators might be able to pass some or al of the fee onto borrowers. As
previously stated, borrowers could opt to roll the additional fee into the mortgage and pay
it over the life of the loan. Alternatively, some or al of the 0.5% could be rolled into the
closing costs fees. Originators are required by law to disclose the fees borrowers pay
when they close on a mortgage; however, the higher fees stil may not deter some
borrowers from refinancing especial y if their total mortgage cost savings over time
would substantial y offset the 0.5% fee.
 If unable to pass al or a large portion of the fee onto borrowers, then originators could
adjust or switch business models. One response could be to stop sel ing eligible
mortgages to Fannie or Freddie particularly for firms in which originating mortgages is
not a significant part of their overal business models. Originators that are principal y
engaged in collecting origination fees from large volumes of mortgages for sale to the
GSEs, however, would consider whether they can stil generate sufficient revenues to
cover most of the expenses per loan. If their primary source of income is generated from
mortgage origination fees, then it could become difficult to quickly switch from and
adopt new business models despite incurring higher costs.

Author Information

Darryl E. Getter

Specialist in Financial Economics

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